NASD Rule 2821, which establishes standards for deferred variable annuity sales and exchanges, currently imposes on broker-dealers suitability, disclosure and training obligations. In Regulatory Notice 09-32 (June 11, 2009), FINRA announced SEC approval of amendments to the Rule, effective February 8, 2010, governing principal review and approval, as well as supervisory and surveillance procedures. The Regulatory Notice also contains supplementary material addressing variable annuity sales and processing issues. Significant provisions of the Regulatory Notice include the following:

  • The scope of Rule 2821 is limited to recommended transactions in deferred variable annuities. FINRA notes, however, that broker-dealers must have processes to detect and correct, when required, registered representatives' mischaracterization of transactions as nonrecommended.
  • A broker-dealer principal must review, and determine whether to accept or reject, a transaction no later than seven business days after an Office of Supervisory Jurisdiction (OSJ) receives a complete and correct copy of the application. FINRA specifically notes that this time period begins when any OSJ received the required documentation; consequently, if a firm requires that a registered representative submit applications to his or her general agency/field OSJ, which then submits them to the Home Office for approval, receipt at the field OSJ triggers the seven-day time period.
  • In conjunction with a prior proposed iteration of this provision, the SEC issued an order exempting certain broker-dealers from the "prompt transmission" requirements providing relief from certain provisions of Securities Exchange Act Rules 15c3-1 and 15c3-3. The exemption applies if "a principal has reviewed and determined whether he or she approves of the purchase or exchange of the deferred variable annuity within seven business days in accordance with the rule." In Regulatory Notice 09-32, FINRA notes that the exemption continues to apply, notwithstanding the new starting point for calculation of the seven-day time period. Additionally, FINRA notes that a broker-dealer does not violate NASD Rules 2330 and 2820 by complying with the seven-day time period of Rule 2821.
  • A broker-dealer must have surveillance procedures to determine if its registered representatives have variable annuity exchange rates that are "inconsistent" with FINRA/NASD rules and federal securities laws, and must implement corrective measures to address these transactions and the representatives who effected them. Neither the Rule nor the Regulatory Notice provides guidance on what constitutes such exchanges.
  • In determining whether a customer has had another variable annuity exchange within the past 36 months, the broker-dealer must: 1) determine whether it effected such an exchange; and 3) ask the customer whether an exchange was effected through another broker-dealer.
  • When an insurance company and a broker-dealer share office space and/or employees, FINRA will consider an application transmitted to the insurance company when a broker-dealer principal has approved the transaction, provided that the insurance company does not issue the contract prior to such approval. Thus, it is arguable that, for purposes of Rule 22c-1 under the 1940 Act, the 2 day/5 day period begins to run upon principal approval and receipt by the insurance company.
  • A broker-dealer can forward purchase payments for a deferred variable annuity transaction to the insurance company prior to principal approval as long as: 1) it discloses the proposed forwarding to the customer; and 2) the broker-dealer and insurance company agree in writing that the insurance company will segregate customer monies in a special account for the benefit of customers, refrain from issuing the contract until principal approval is received, and promptly return the payment to the customer at his or her request prior to principal approval or rejection.

The Regulatory Notice, available here, also contains provisions addressing lump sum payments for the purchase of deferred variable annuities and other products, forwarding customer funds to an IRA custodian prior to principal approval, and the use of broker-dealer information for contract issuance.